Market expectations had moved rapidly in the final few weeks of 2023, discounting almost seven rate cuts by the US Federal Reserve (Fed) in 2024. Our base case was more cautious, and the market has now rebalanced, discounting three 0.25% cuts which is consistent with the Fed’s projections. The Fed has rightly been cautious, awaiting further improvement in inflation while highlighting the risk of keeping rates too high for too long by putting too much emphasis on short-term economic data. A gradual loosening cycle should get underway mid-year, reflecting the lower inflation trajectory. We would not be surprised if higher unemployment and lower growth later this year leads to the market discounting further cuts in rates well into 2025. The Bank of Canada has been hawkish, but the underlying economic developments should allow policymakers to follow the Fed towards lower interest rates.
The Swiss National Bank became the first major Central Bank to cut interest rates and it is a matter of time before the European Central Bank and the Bank of England follow suit. The comments from both Central Banks certainly point to the start of a loosening cycle, with three or four rate cuts likely this year – but we would not be surprised by a steeper rate cut.
The Bank of Japan (BoJ) finally ended the prolonged negative interest rate regime reflecting the higher spring wage round which makes it more likely that inflation may finally remain close to 2%. Government bond buying was retained, even though ETF purchases will end. Typically, the BoJ lowered its growth and inflation projections and are likely to be cautious.
In line with our start of the year views, the shift towards lower interest rates has begun – but the initial steps will be cautious in this year of transition.
To find more about the latest house views from London & Capital’s Investment Desk, read the full AndPapers Q2 2024 here.
